The Post Office has launched the latest version of the Inflation Linked Bond.
The Bond offers two terms, three years and five years and a day, with interest linked to RPI (Retail Prices Index) plus a fixed amount of 0.24% per annum on the three year version and 0.98% per annum on the longer term account.
RPI generally runs higher than CPI (Consumer Prices Index) and includes the cost of mortgage interest rates, in August RPI was 5.2% and has been rising consistently over the past year or so.
Richard Norman, director of savings and investments at the Post Office, said: “Since we launched the first Inflation Linked Bond earlier this year, inflation has remained high, leaving savers worried about the value of their hard earned cash. This new issue of the Inflation Linked Bond offers them another chance to get peace of mind that their savings will be protected against the eroding effects of inflation.”
The account was launched to much media hype, the Daily Telegraph for example, said that “savers had been thrown a lifeline”.
However is the account as good as it seems?
The account is not available as an ISA (Individual Savings Account) therefore for anyone except non taxpayers interest is taxable.
At current levels of inflation the additional fixed payment is not enough to make up for the tax which would have to be paid; the net return therefore is therefore below RPI.
Of course if inflation did fall in months and years to come, as the Bank of England are predicting, then the fixed payment may well be sufficient to mean that the net return is equal to or above inflation.
Other savings options
However, if inflation does indeed fall then savers could be locked into an account which whilst it may pay an inflation beating rate actually looks poor compared to other options.
Other commentators are also concerned about this point, Michelle Slade of Moneyfacts, said: “If savers main concern is beating inflation then these accounts are a good option, but when inflation falls and base rate rises savers could find themselves locked into an account that is less competitive than the rest of the market.”
For over a year now savers have been scratching their heads looking for an inflation beating return. To beat the current levels of RPI a basic rate tax payer needs a 6.5% return each year, if you pay 40% tax you need 8.66% and a 50% tax payer needs a massive 10.4%.
There are no savings accounts which provide these returns and with the Bank of England showing no signs of pushing rates up is the Post Office Inflation Linked Bond a worthwhile option?
We can see how this account is attractive for non tax payers who are prepared to tie their savings up for a considerable period and who want a return linked to inflation.
If inflation continues at current levels the return for tax payers is less than inflation, conversely if inflation falls there are likely to be other savings accounts paying a more competitive rate of return.
For both basic and higher rate tax payers we think there are better options, using Cash ISAs and fixed rate bonds might not be better now but could offer more attractive rates if inflation falls as the Bank of England are predicting.
It’s a shame that the Post Office Inflation Bond id not available as an ISA or with more flexible terms, it just shows how attractive the National Savings Index Linked Certificates were.